Boglehead Challenge -- Help me "win the game".
Boglehead Challenge -- Help me "win the game".
I would greatly appreciate the knowledge, experience, and insight from Bogleheads. Your challenge.....if you so choose......is to help me "win the game" by portfolio design!
Background Info: 50 years old; 9-mo emergency fund; no debt; married; no kids (no legacy concerns); 25% Fed Bracket (Ohio resident)
Future assets:
Pension @ 57 (COLA'd beginning @ 62): 40k
Pension supplement from 57-62: 18k
Social Security @ 62: 24k [Would like to defer to FRA or better yet, 70.]
Currently invested assets = 1mil:
-Tax-deferred (TSP-401k): 750k [adding 25k yearly]
-Roth @ Vanguard: 125k [adding 2 X 6.5k yearly}
-Taxable @ Vanguard: 125k
Windfall (inheritance) = 500k
Goal: For me, to "win the game" would be 100k yearly (pre-tax).
Boglehead challenge: I have purposely not broken out my individual holdings.....instead assume a clean slate....so, my challenge to you is to use the existing amounts within the Roth, TSP-401k, and taxable brokerage along with the 500k windfall (inheritance) to design a portfolio to help me "win the game". Please use my desired 50/50 allocation.
1.) How would you allocate equities/bonds across the Roth, TSP-401k, and taxable accounts?
2.) Tax-efficiency placement of assets: I have read the Boglehead wiki on tax-efficient placement but there isn't total agreement. Would you suggest equal-location or asset-location in this scenario?
3.) Can we "win the game" with the current account balances, future contributions, and your suggested portfolio/plan?
4.) How would you prepare to defer social security to FRA/70? Build safe assets (CDs, I-Bonds, savings) to draw down or instead use a portfolio SWR?
5.) Any other comments, suggestions, and experiences are very welcomed.
I am doing the best that I can to DIY navigate towards a rewarding future. But I know enough to know that I first need your help to get me on course and then hopefully make smaller course adjustments/corrections in the future.
I am so glad to have found the Boglehead forum. Thank you in advance for your efforts. It will be greatly appreciated!
Background Info: 50 years old; 9-mo emergency fund; no debt; married; no kids (no legacy concerns); 25% Fed Bracket (Ohio resident)
Future assets:
Pension @ 57 (COLA'd beginning @ 62): 40k
Pension supplement from 57-62: 18k
Social Security @ 62: 24k [Would like to defer to FRA or better yet, 70.]
Currently invested assets = 1mil:
-Tax-deferred (TSP-401k): 750k [adding 25k yearly]
-Roth @ Vanguard: 125k [adding 2 X 6.5k yearly}
-Taxable @ Vanguard: 125k
Windfall (inheritance) = 500k
Goal: For me, to "win the game" would be 100k yearly (pre-tax).
Boglehead challenge: I have purposely not broken out my individual holdings.....instead assume a clean slate....so, my challenge to you is to use the existing amounts within the Roth, TSP-401k, and taxable brokerage along with the 500k windfall (inheritance) to design a portfolio to help me "win the game". Please use my desired 50/50 allocation.
1.) How would you allocate equities/bonds across the Roth, TSP-401k, and taxable accounts?
2.) Tax-efficiency placement of assets: I have read the Boglehead wiki on tax-efficient placement but there isn't total agreement. Would you suggest equal-location or asset-location in this scenario?
3.) Can we "win the game" with the current account balances, future contributions, and your suggested portfolio/plan?
4.) How would you prepare to defer social security to FRA/70? Build safe assets (CDs, I-Bonds, savings) to draw down or instead use a portfolio SWR?
5.) Any other comments, suggestions, and experiences are very welcomed.
I am doing the best that I can to DIY navigate towards a rewarding future. But I know enough to know that I first need your help to get me on course and then hopefully make smaller course adjustments/corrections in the future.
I am so glad to have found the Boglehead forum. Thank you in advance for your efforts. It will be greatly appreciated!
Last edited by Tub84 on Fri Jun 23, 2017 9:37 am, edited 1 time in total.
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- Joined: Wed Jan 11, 2017 7:05 pm
Re: Boglehead Challenge -- Help me "win the game".
Are you looking to retire today?
Your pension and SS covers about 65% of your target. More if you are able to delay SS. You probably want to end up with about $1M to supplement SS. That leaves you with a budget of about $500K to make it through your bridge years.
I do not think it is safe to retire today. You either need to save more, work longer, and/or reduce your expenses. If you could get by on $80K that might make a big difference. Then you only need about $500K in retirement, giving you more to spend in your bridge years.
One key question is what is your plan for health care. Does your pension employer have a retiree plan that would cover you? I don't think you have enough to self-insure and cover your bridge years.
Your pension and SS covers about 65% of your target. More if you are able to delay SS. You probably want to end up with about $1M to supplement SS. That leaves you with a budget of about $500K to make it through your bridge years.
I do not think it is safe to retire today. You either need to save more, work longer, and/or reduce your expenses. If you could get by on $80K that might make a big difference. Then you only need about $500K in retirement, giving you more to spend in your bridge years.
One key question is what is your plan for health care. Does your pension employer have a retiree plan that would cover you? I don't think you have enough to self-insure and cover your bridge years.
Re: Boglehead Challenge -- Help me "win the game".
I think we'll need the fund options for the TSP-401k.
Re: Boglehead Challenge -- Help me "win the game".
Is the 500k windfall in addition to the 1MM invested assets? If so, that gets you 60k/year.
Paul
If the 40k and 18k pensions are annual income plus 24k in SS, then you have already won.Pension @ 57 (COLA'd beginning @ 62): 40k
Pension supplement from 57-62: 18k
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: Boglehead Challenge -- Help me "win the game".
Although you do not have children, these two threads should be of help wrt taxes:
Families with $200,000: viewtopic.php?t=79510
Retirees with 6-figure expenses: viewtopic.php?t=87471
Families with $200,000: viewtopic.php?t=79510
Retirees with 6-figure expenses: viewtopic.php?t=87471
Last edited by livesoft on Fri Jun 23, 2017 9:39 am, edited 1 time in total.
Re: Boglehead Challenge -- Help me "win the game".
There are only five: C (S&P), I (International, not including emerging markets), S (US small-cap), F (sort of a "total bond" fund), and G (special no-risk government securities), plus lifecycle funds with various target dates, all with ridiculously low ERslazydavid wrote:I think we'll need the fund options for the TSP-401k.
Here's the overview:
https://www.tsp.gov/InvestmentFunds/Fun ... atrix.html
Re: Boglehead Challenge -- Help me "win the game".
Need some FERS retirees to check in.
Re: Boglehead Challenge -- Help me "win the game".
Edited original post to reflect contributing 2 x 6.5k yearly to two Roths.
Re: Boglehead Challenge -- Help me "win the game".
Not looking to retire until 57....seven more years.
I will have access to employer backed health after retirement.
I will have access to employer backed health after retirement.
Re: Boglehead Challenge -- Help me "win the game".
Look at your retirement in two parts.
Part 1 is the period from 57 to 70. You'll need to take $42K/year (plus an inflation adjustment for your pension) from your assets until 62 and then $60K/year until 70 to cover expenses. This is money that should be invested fairly conservatively -- cash, bonds, and a little stock. And this will mean a big chunk of your assets spent down, $690K in current dollars (excluding the pension inflation portion).
Part 2 is the period from 70 forward when you'll need to withdraw less from your assets since your Social Security will kick in. (Does the $24K include the spousal benefit?) The money for this stage should be invested with larger stock holdings, since this may need to last 25 years or more, like a 60/40 portfolio.
Generally you'd want to spend the taxable first, but that is also where you'd want to put your stock allocation. So that is a bit if a conundrum. Maybe The LifeStrategy Income fund for the inheritance and cash for the rest of the taxable? Then a more aggressive allocation in the tax-advantaged. It might make sense to do some Roth conversions beginning at 62, once your supplement is gone. Maybe others will weigh in on the investing end.
You should be OK meeting your goals. You'll need about $900K in today's dollars to sustain the $36K you'll need from 70 on. But you do need to consider your spouse's financial situation if you die first. The pension survivor benefit will be lower and so will SS. It may be that your spouse's expenses will decline less than the annuitized income, and spouse will need to draw more from assets. (But, as mentioned earlier, you do need to clarify if the $24K includes spousal.)
Part 1 is the period from 57 to 70. You'll need to take $42K/year (plus an inflation adjustment for your pension) from your assets until 62 and then $60K/year until 70 to cover expenses. This is money that should be invested fairly conservatively -- cash, bonds, and a little stock. And this will mean a big chunk of your assets spent down, $690K in current dollars (excluding the pension inflation portion).
Part 2 is the period from 70 forward when you'll need to withdraw less from your assets since your Social Security will kick in. (Does the $24K include the spousal benefit?) The money for this stage should be invested with larger stock holdings, since this may need to last 25 years or more, like a 60/40 portfolio.
Generally you'd want to spend the taxable first, but that is also where you'd want to put your stock allocation. So that is a bit if a conundrum. Maybe The LifeStrategy Income fund for the inheritance and cash for the rest of the taxable? Then a more aggressive allocation in the tax-advantaged. It might make sense to do some Roth conversions beginning at 62, once your supplement is gone. Maybe others will weigh in on the investing end.
You should be OK meeting your goals. You'll need about $900K in today's dollars to sustain the $36K you'll need from 70 on. But you do need to consider your spouse's financial situation if you die first. The pension survivor benefit will be lower and so will SS. It may be that your spouse's expenses will decline less than the annuitized income, and spouse will need to draw more from assets. (But, as mentioned earlier, you do need to clarify if the $24K includes spousal.)
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Boglehead Challenge -- Help me "win the game".
Delamer,
Thanks for the response:
I'm hoping others can suggest a plan that avoids or lessens these pitfalls.
Thanks for the response:
This is one of the concerns that I am having difficulty wrapping my mind around. Traditional portfolio construction would suggest most if not all of my equity allotment in this scenario to the taxable brokerage account due to tax efficiency. But then relatively soon appears the need to draw down much of the taxable account in the early retirement years."Generally you'd want to spend the taxable first, but that is also where you'd want to put your stock allocation. So that is a bit if a conundrum. Maybe The LifeStrategy Income fund for the inheritance and cash for the rest of the taxable? Then a more aggressive allocation in the tax-advantaged. It might make sense to do some Roth conversions beginning at 62, once your supplement is gone. Maybe others will weigh in on the investing end."
I'm hoping others can suggest a plan that avoids or lessens these pitfalls.
-
- Posts: 12262
- Joined: Wed Jan 11, 2017 7:05 pm
Re: Boglehead Challenge -- Help me "win the game".
In that case, you are all set. Very good points by delamer above. I would invest the inheritance conservatively and spend from there first. Consider tax exempt munis if worried about having bonds in taxable.Tub84 wrote:Not looking to retire until 57....seven more years.
I will have access to employer backed health after retirement.
Re: Boglehead Challenge -- Help me "win the game".
Tub84 wrote:I would greatly appreciate the knowledge, experience, and insight from Bogleheads. Your challenge.....if you so choose......is to help me "win the game" by portfolio design!
Background Info: 50 years old; 9-mo emergency fund; no debt; married; no kids (no legacy concerns); 25% Fed Bracket (Ohio resident)
Future assets:
Pension @ 57 (COLA'd beginning @ 62): 40k
Pension supplement from 57-62: 18k
Social Security @ 62: 24k [Would like to defer to FRA or better yet, 70.]
Currently invested assets = 1mil:
-Tax-deferred (TSP-401k): 750k [adding 25k yearly]
-Roth @ Vanguard: 125k [adding 2 X 6.5k yearly}
-Taxable @ Vanguard: 125k
Windfall (inheritance) = 500k
Goal: For me, to "win the game" would be 100k yearly (pre-tax).
Boglehead challenge: I have purposely not broken out my individual holdings.....instead assume a clean slate....so, my challenge to you is to use the existing amounts within the Roth, TSP-401k, and taxable brokerage along with the 500k windfall (inheritance) to design a portfolio to help me "win the game". Please use my desired 50/50 allocation.
1.) How would you allocate equities/bonds across the Roth, TSP-401k, and taxable accounts?
2.) Tax-efficiency placement of assets: I have read the Boglehead wiki on tax-efficient placement but there isn't total agreement. Would you suggest equal-location or asset-location in this scenario?
This is a bit tricky because you'll need to draw on your taxable assets in just 7 years, although normally stock equity index funds make the most sense in taxable. Yields are so low on bonds though that this isn't the big issue it once was - and your income tax rate isn't terrible anyway.
So I recommend putting 100% of the $125K Roth into the Vanguard Total Stock Market Index (admiral shares).
Put half the TSP in the bond fund, a quarter in the small cap fund, and a quarter in the S&P 500 index
Put half the $625K taxable in the Vanguard Total bond market index (admiral shares) and half in the total international index (admiral shares)
That puts 41% of your equity holdings in international to begin with, but over time that will lessen if new contributions to the 401k and roth go to US equities (and bonds). You could add a bit more US equities to the taxable account to begin with if you want less in international. Point is to keep international holdings in taxable - that way you can take advantage of the foreign income tax credit each year.
I like trying to keep as few funds as possible in each account to make rebalancing a bit easier. But the reality is that you could have each account be fully diversified too if you want since you have good funds in all of them.
3.) Can we "win the game" with the current account balances, future contributions, and your suggested portfolio/plan?
Yes! You are definitely winning.
4.) How would you prepare to defer social security to FRA/70? Build safe assets (CDs, I-Bonds, savings) to draw down or instead use a portfolio SWR?
I recommend using a portfolio SWR. You don't need to go as conservative as a CD ladder especially since your pension will cover basic living expenses. I would draw down your taxable holdings first while also converting enough of your TSP to a Roth IRA each year as you can while staying in the 0% tax bracket (or maybe even in the 15% tax bracket). If you're lucky with the markets, you may never even get to the point where you're tapping the Traditional or Roth assets.
5.) Any other comments, suggestions, and experiences are very welcomed.
Whether to delay SSI to age 70 depends a lot on your health status and life expectancy. The longer you live, the more it makes sense to do. But the fact is that many retirees don't live long enough to pass the breakeven point which is usually mid to late 80s. So it's a wash of a decision in my view. Take it early if you need/want to, but I'd definitely delay it if your pension dies with you so that your spouse has a higher base income once you're gone if you go first.
I am doing the best that I can to DIY navigate towards a rewarding future. But I know enough to know that I first need your help to get me on course and then hopefully make smaller course adjustments/corrections in the future.
I am so glad to have found the Boglehead forum. Thank you in advance for your efforts. It will be greatly appreciated!
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Boglehead Challenge -- Help me "win the game".
Meg77 wrote:Tub84 wrote:I would greatly appreciate the knowledge, experience, and insight from Bogleheads. Your challenge.....if you so choose......is to help me "win the game" by portfolio design!
Background Info: 50 years old; 9-mo emergency fund; no debt; married; no kids (no legacy concerns); 25% Fed Bracket (Ohio resident)
Future assets:
Pension @ 57 (COLA'd beginning @ 62): 40k
Pension supplement from 57-62: 18k
Social Security @ 62: 24k [Would like to defer to FRA or better yet, 70.]
Currently invested assets = 1mil:
-Tax-deferred (TSP-401k): 750k [adding 25k yearly]
-Roth @ Vanguard: 125k [adding 2 X 6.5k yearly}
-Taxable @ Vanguard: 125k
Windfall (inheritance) = 500k
Goal: For me, to "win the game" would be 100k yearly (pre-tax).
Boglehead challenge: I have purposely not broken out my individual holdings.....instead assume a clean slate....so, my challenge to you is to use the existing amounts within the Roth, TSP-401k, and taxable brokerage along with the 500k windfall (inheritance) to design a portfolio to help me "win the game". Please use my desired 50/50 allocation.
1.) How would you allocate equities/bonds across the Roth, TSP-401k, and taxable accounts?
2.) Tax-efficiency placement of assets: I have read the Boglehead wiki on tax-efficient placement but there isn't total agreement. Would you suggest equal-location or asset-location in this scenario?
This is a bit tricky because you'll need to draw on your taxable assets in just 7 years, although normally stock equity index funds make the most sense in taxable. Yields are so low on bonds though that this isn't the big issue it once was - and your income tax rate isn't terrible anyway.
So I recommend putting 100% of the $125K Roth into the Vanguard Total Stock Market Index (admiral shares).
Put half the TSP in the bond fund, a quarter in the small cap fund, and a quarter in the S&P 500 index
Put 75% of the $625K taxable in the Vanguard Total bond market index (admiral shares) and 25% in the total international index (admiral shares)
That puts 20.8% of your equity holdings in international and 43% of your total assets in bonds. That's plenty in my view, but I know you said you want 50% - so feel free to tweak it a bit. Point is to keep international holdings in taxable - that way you can take advantage of the foreign income tax credit each year.
I like trying to keep as few funds as possible in each account to make rebalancing a bit easier. But the reality is that you could have each account be fully diversified too if you want since you have good funds in all of them.
3.) Can we "win the game" with the current account balances, future contributions, and your suggested portfolio/plan?
Yes! You are definitely winning.
4.) How would you prepare to defer social security to FRA/70? Build safe assets (CDs, I-Bonds, savings) to draw down or instead use a portfolio SWR?
I recommend using a portfolio SWR. You don't need to go as conservative as a CD ladder especially since your pension will cover basic living expenses. I would draw down your taxable holdings first while also converting enough of your TSP to a Roth IRA each year as you can while staying in the 0% tax bracket (or maybe even in the 15% tax bracket). If you're lucky with the markets, you may never even get to the point where you're tapping the Traditional or Roth assets.
5.) Any other comments, suggestions, and experiences are very welcomed.
Whether to delay SSI to age 70 depends a lot on your health status and life expectancy. The longer you live, the more it makes sense to do. But the fact is that many retirees don't live long enough to pass the breakeven point which is usually mid to late 80s. So it's a wash of a decision in my view. Take it early if you need/want to, but I'd definitely delay it if your pension dies with you so that your spouse has a higher base income once you're gone if you go first.
I am doing the best that I can to DIY navigate towards a rewarding future. But I know enough to know that I first need your help to get me on course and then hopefully make smaller course adjustments/corrections in the future.
I am so glad to have found the Boglehead forum. Thank you in advance for your efforts. It will be greatly appreciated!
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Boglehead Challenge -- Help me "win the game".
Meg77,
Thank you for the response.
I appreciate the specific breakout that you provided for stock/bond allocations to the Roth, TSP-401k, and taxable brokerage. So, the approaching need to primarily draw funds from the taxable account seems to make an "equal location" approach to portfolio construction more appropriate (versus "asset location") in this scenario? Albeit with a tilt away from tax-efficiency.
So, a portfolio SWR should also work for the social security bridge as an alternative to moving to very conservative assets:
Thank you for the response.
I appreciate the specific breakout that you provided for stock/bond allocations to the Roth, TSP-401k, and taxable brokerage. So, the approaching need to primarily draw funds from the taxable account seems to make an "equal location" approach to portfolio construction more appropriate (versus "asset location") in this scenario? Albeit with a tilt away from tax-efficiency.
So, a portfolio SWR should also work for the social security bridge as an alternative to moving to very conservative assets:
I sincerely appreciate these insights and suggestions.4.) How would you prepare to defer social security to FRA/70? Build safe assets (CDs, I-Bonds, savings) to draw down or instead use a portfolio SWR?
I recommend using a portfolio SWR. You don't need to go as conservative as a CD ladder especially since your pension will cover basic living expenses. I would draw down your taxable holdings first while also converting enough of your TSP to a Roth IRA each year as you can while staying in the 0% tax bracket (or maybe even in the 15% tax bracket).
Re: Boglehead Challenge -- Help me "win the game".
I don't see any pitfalls to making your taxable portfolio 100% tax-efficient equities. The reason is that if you select an asset allocation such as 60% equities and 40% bonds which would be good for the rest of your life, then the equities have to go somewhere. It won't stop them from falling if the market falls just because they are held in a Roth or in a 401(k) or in a taxable account. At least if they are held in a taxable account, then you might be able to do some tax-loss harvesting and get the IRS to help pay for your losses.Tub84 wrote:This is one of the concerns that I am having difficulty wrapping my mind around. Traditional portfolio construction would suggest most if not all of my equity allotment in this scenario to the taxable brokerage account due to tax efficiency. But then relatively soon appears the need to draw down much of the taxable account in the early retirement years.
I'm hoping others can suggest a plan that avoids or lessens these pitfalls.
Another reason is that you state you will not retire until age 57. That means that your taxable account only has to last about 2.5 years in reality before you can begin the age-59.5 penalty-free withdrawals from tax-deferred accounts. (Yes, I know there are other ways to get penalty-free withdrawals earlier from tax-deferred account, but that doesn't seem necessary in Tub84's situation.)
Conversely, if the market go up, then all those equities in taxable will make it last so much more and allow for more Roth conversions and delay of SS.
So my advice is to get over your concerns and really think this through. I stopped working full-time about 10 years ago and have always had 100% stocks in taxable including in 2000-2002 and in 2008-2009 and so on. I do all rebalancing in tax-advantaged accounts.
Re: Boglehead Challenge -- Help me "win the game".
Livesoft,
I certainly appreciate you lending your knowledge and experience to my situation.
The full-on "taxable portfolio 100% tax-efficient equities" appears workable within the parameters described here. There are a number of positive factors going this route as you explained.
That you were able to ride through the downturns with 100% equities in taxable is encouraging.
I certainly appreciate you lending your knowledge and experience to my situation.
The full-on "taxable portfolio 100% tax-efficient equities" appears workable within the parameters described here. There are a number of positive factors going this route as you explained.
That you were able to ride through the downturns with 100% equities in taxable is encouraging.
I am definitely absorbing all the information and advice that I can get. I graciously appreciate it as I slowly alleviate concerns while on the way to a finalized action plan.I stopped working full-time about 10 years ago and have always had 100% stocks in taxable including in 2000-2002 and in 2008-2009 and so on.
So my advice is to get over your concerns and really think this through.
Re: Boglehead Challenge -- Help me "win the game".
I agree with this, and I amend my previous suggestion accordingly. I overlooked the fact that you really only need to live off solely taxable accounts for 2.5 years, so the risk is minimal that you wouldn't be able to do that (if the markets were doing that badly when you turn 57 you might well elect to delay retirement by a year or two anyway). Besides, the advantages to being able to tax loss harvest in your taxable account are indeed compelling benefits.livesoft wrote:I don't see any pitfalls to making your taxable portfolio 100% tax-efficient equities. The reason is that if you select an asset allocation such as 60% equities and 40% bonds which would be good for the rest of your life, then the equities have to go somewhere. It won't stop them from falling if the market falls just because they are held in a Roth or in a 401(k) or in a taxable account. At least if they are held in a taxable account, then you might be able to do some tax-loss harvesting and get the IRS to help pay for your losses.Tub84 wrote:This is one of the concerns that I am having difficulty wrapping my mind around. Traditional portfolio construction would suggest most if not all of my equity allotment in this scenario to the taxable brokerage account due to tax efficiency. But then relatively soon appears the need to draw down much of the taxable account in the early retirement years.
I'm hoping others can suggest a plan that avoids or lessens these pitfalls.
Another reason is that you state you will not retire until age 57. That means that your taxable account only has to last about 2.5 years in reality before you can begin the age-59.5 penalty-free withdrawals from tax-deferred accounts. (Yes, I know there are other ways to get penalty-free withdrawals earlier from tax-deferred account, but that doesn't seem necessary in Tub84's situation.)
Conversely, if the market go up, then all those equities in taxable will make it last so much more and allow for more Roth conversions and delay of SS.
So my advice is to get over your concerns and really think this through. I stopped working full-time about 10 years ago and have always had 100% stocks in taxable including in 2000-2002 and in 2008-2009 and so on. I do all rebalancing in tax-advantaged accounts.
So in light of this I'd make the taxable account all equities (total us stock market and total international admiral index funds), and boost your bond holding in the TSP to whatever level you are comfortable instead.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Boglehead Challenge -- Help me "win the game".
Meg77,
Thank you for chiming back in and adjusting your suggestions as well as your backing of Livesoft's guidance.
Thank you for chiming back in and adjusting your suggestions as well as your backing of Livesoft's guidance.
Again, I am indebted and appreciative of the Bogleheads forum!So in light of this I'd make the taxable account all equities (total us stock market and total international admiral index funds), and boost your bond holding in the TSP to whatever level you are comfortable instead.
Re: Boglehead Challenge -- Help me "win the game".
This is not a conundrum at all, because you can always rebalance in the tax-advantaged accounts. To use the OP's numbers, and just bundle things into two buckets (taxable and non-taxable), (s)he is starting with $875k in retirement accounts, and $625k in taxable (after the inheritance), for a total of $1.5M. At OP's desired 50/50 AA (which I think is a tad too conservative, but that's another discussion), that means (s)he needs a total of $750k each in stocks/bonds. So (s)he'll start with:delamer wrote:Generally you'd want to spend the taxable first, but that is also where you'd want to put your stock allocation. So that is a bit if a conundrum. Maybe The LifeStrategy Income fund for the inheritance and cash for the rest of the taxable? Then a more aggressive allocation in the tax-advantaged. It might make sense to do some Roth conversions beginning at 62, once your supplement is gone. Maybe others will weigh in on the investing end.
Taxable: $625k stock
Retirement: $125k stock, $750k bonds
Now, for the moment, let's ignore market returns, say OP is retiring today and needs to make this year's withdrawal today. (S)He wants to take $100k out of taxable, because (s)he hasn't reached retirement age and can't touch those other accounts without penalty. This requires selling $100k of stock in taxable to make the desired income for the year, which brings the balance down to $525k and throws the AA out of whack (46/54).
To put everything back in line, all (s)he has to do is sell $50k of bonds in the retirement accounts, and use the proceeds to purchase $50k of stock. Now the balances are:
Taxable: $525k stock
Retirement: $175k stock, $700k bonds
And AA is still 50/50. Repeat from year to year, recalculating the numbers to account for any gains.
Re: Boglehead Challenge -- Help me "win the game".
Do your numbers work if there is a 35% stock market downturn that lasts for a few years? Yes, you can use the tax-advantaged to rebalance regardless.lazydavid wrote:This is not a conundrum at all, because you can always rebalance in the tax-advantaged accounts. To use the OP's numbers, and just bundle things into two buckets (taxable and non-taxable), (s)he is starting with $875k in retirement accounts, and $625k in taxable (after the inheritance), for a total of $1.5M. At OP's desired 50/50 AA (which I think is a tad too conservative, but that's another discussion), that means (s)he needs a total of $750k each in stocks/bonds. So (s)he'll start with:delamer wrote:Generally you'd want to spend the taxable first, but that is also where you'd want to put your stock allocation. So that is a bit if a conundrum. Maybe The LifeStrategy Income fund for the inheritance and cash for the rest of the taxable? Then a more aggressive allocation in the tax-advantaged. It might make sense to do some Roth conversions beginning at 62, once your supplement is gone. Maybe others will weigh in on the investing end.
Taxable: $625k stock
Retirement: $125k stock, $750k bonds
Now, for the moment, let's ignore market returns, say OP is retiring today and needs to make this year's withdrawal today. (S)He wants to take $100k out of taxable, because (s)he hasn't reached retirement age and can't touch those other accounts without penalty. This requires selling $100k of stock in taxable to make the desired income for the year, which brings the balance down to $525k and throws the AA out of whack (46/54).
To put everything back in line, all (s)he has to do is sell $50k of bonds in the retirement accounts, and use the proceeds to purchase $50k of stock. Now the balances are:
Taxable: $525k stock
Retirement: $175k stock, $700k bonds
And AA is still 50/50. Repeat from year to year, recalculating the numbers to account for any gains.
But if you continue the same strategy of withdrawing from taxable first, then you are selling stocks "low." If you keep some cash/short-term bonds in taxable, you can avoid that.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Boglehead Challenge -- Help me "win the game".
So what if you sell stocks low in taxable as long as you also buy them low in tax-advantaged.delamer wrote:But if you continue the same strategy of withdrawing from taxable first, then you are selling stocks "low." If you keep some cash/short-term bonds in taxable, you can avoid that.
This is described in the wiki article: https://www.bogleheads.org/wiki/Placing ... ed_account
Whether your portfolio is large enough to withstand a 35% drop in stocks from sequence of return risks is a completely separate question I think.
Re: Boglehead Challenge -- Help me "win the game".
I see your point regarding buying low. I guess the question is whether you have the discipline to rebalance, but that is true regardless of what is going on in the market when you need to sell.livesoft wrote:So what if you sell stocks low in taxable as long as you also buy them low in tax-advantaged.delamer wrote:But if you continue the same strategy of withdrawing from taxable first, then you are selling stocks "low." If you keep some cash/short-term bonds in taxable, you can avoid that.
This is described in the wiki article: https://www.bogleheads.org/wiki/Placing ... ed_account
Whether your portfolio is large enough to withstand a 35% drop in stocks from sequence of return risks is a completely separate question I think.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Boglehead Challenge -- Help me "win the game".
Yup. Again to keep things easy, let's say the OP is the world's worst market timer, and in the one day between setting the AA and taking this year's distributions, stocks crash by 35%, and bonds don't change. So before the distribution, the accounts look like this:delamer wrote:Do your numbers work if there is a 35% stock market downturn that lasts for a few years? Yes, you can use the tax-advantaged to rebalance regardless.
Taxable: $406.25k stock
Retirement: $81.25k stock, $750k bonds
After the distribution, the total funds remaining are $1.1375M, but the AA is now 34/66. That means the new target is to have $568.75k in both stocks and bonds to get back to 50/50. So what you would need to do is sell $181.25k in bonds, and buy stock. The resulting balances are:
Taxable: $306.25k stock
Retirement: $262.5k stock, $568.75k bonds
Effectively, what you've done is sell $100k in bonds and withdrawn it for living expenses, and sold a further $81.25k in bonds to buy stock low and rebalance.
As described above, it's totally unnecessary. Money is fungible, and AA is measured over the entire portfolio. Doesn't matter where the bonds are that you sell when you rebalance.delamer wrote:But if you continue the same strategy of withdrawing from taxable first, then you are selling stocks "low." If you keep some cash/short-term bonds in taxable, you can avoid that.
Last edited by lazydavid on Fri Jun 23, 2017 7:27 pm, edited 1 time in total.
Re: Boglehead Challenge -- Help me "win the game".
Ah, discipline!delamer wrote:I see your point regarding buying low. I guess the question is whether you have the discipline to rebalance, but that is true regardless of what is going on in the market when you need to sell.
What would you do if your bond funds dropped 4% in the past 3 months, then your equities dropped 20% in the next month. Would you sell your bond funds to buy equities even though you would be "locking in losses" in your bond funds with no chance to buy bond funds low on the horizon?
Or better yet, you had just taken a windfall and invested it into stocks and bonds, then your bond funds dropped AND your stock funds dropped.
This is where the rubber meets the road when it comes to rebalancing and buying low.
Re: Boglehead Challenge -- Help me "win the game".
Delamer, Livesoft, Lazydavid,
Thanks for the discussion and numerical examples. All this information is a great resource as I revise my IPS.
Thanks for the discussion and numerical examples. All this information is a great resource as I revise my IPS.